Based Accounting Research Study No.7, 1965
Account for sales, revenues, income, cost of sales, expenses, gains, and losses in such a manner as to present fairly the results of operations for the period or periods of time covered.
Sales, revenues and income should not be anticipated or materially overstated or understated. Accordingly, there must be proper cutoff accounting at the beginning and end of the period or periods.
Costs of sales and expenses should be appropriately matched against the periodic sales and revenues. It follows that there must be proper cutoff accounting for inventories and liabilities for costs and expenses at the beginning and end of the period or periods.
Appropriate charges should be made for depreciation and depletion of fixed assets and for amortization of other deferred costs.
Proper distribution of costs should be made as between fixed assets, inventories, maintenance and expense. Direct costs are usually identifiable and common costs applicable to more than one activity should be distributed on appropriate cost incurrence bases such as time or use factors.
Contingency provisions and reserves should not be misused as a means of arbitrarily reducing income or shifting income from one period to another.
Nonrecurring and extraordinary gains and losses should be recognized n the period they occur, but should be shown separately from the ordinary and usual operations.
There is a strong presumption that all gains and losses will be included in periodic statements unless they are of such a magnitude in relation to revenues and expenses from regular operations as to cause the statements to be misleading.
Disclose rental charges under material leases and capitalize those which are in effect installment purchases of fixed assets.
If accounting principles in the determination of periodic results have not been consistently maintained, the effect of the change should be stated.
Account for the equity capital invested by stockholders through contribution of assets or retained by earnings in a meaningful manner on a cumulative basis and as to changes during the period covered. The account structure and presentation in financial statements of a business entity are designed to meet statutory and corporate charger requirements and to portray significant financial relationships.
From a financial viewpoint the capital invested by stockholders is the corpus of the enterprise and its identity should be fully maintained. Any impairment of invested capital resulting from operating deficits, losses of any nature, dividend distributions in excess of earnings, and treasury stock purchases is accounted for both currently and cumulatively.
Account for the assets invested in the enterprise by stockholders (through property contributed or retained earnings) and creditors, in a meaningful manner, so that when considered with the liabilities adn equity capital of stockholders there will be fair presentation of the financial position of the enterprise both at the beginning and end of the period. it should be understood that financial position or balance sheet statements do not purport to show either present values of assets to the enterprise or values which might be realized in liquidation.
Items classified as current assets should be carried at not more than is reasonably expected to be realized within one year or within the normal operating cycle of the particular business.
Receivables should be reduced by allowance accounts to cover expected collection and other losses.
Inventories should be carried at cost or market, whichever the lower. Cost comprises direct costs plus factory overhead costs, and the basis of determination (e.g., Lifo, Fifo, or average) should be stated.
Prepaid items should be properly chargeable to future periods.
Account for all known liabilities in a meaningful manner in order that their summarization, considered together with the statement of assets and equity invested by stockholders, will fairly present the financial position of the enterprise at the beginning and end of the period.
Financial statements should comply with the applicable reporting standard included in generally accepted accounting standards. Reporting to investors should be performed on an entity basis.
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